Co-Op Group announces 'disastrous' full-year loss

The U.K.'s Co-operative Group announced a £2.5 billion ($4.2 billion) full-year loss on Thursday bringing to an end what the interim chief executive called a "disastrous year" for the country's largest mutual business.

The Co-Op, owned by its nearly eight million members, runs funeral homes, supermarkets and banks in the U.K. and was once regarded as a bastion of ethical trading with its collective ownership business model.

The group reported that the heavy losses were a result of recapitalizing its troubled banking division. Revenues reached £10.5 billion in 2013, it reported, falling from £11 billion in 2012. Underlying profit also shrunk at the company and was hit by an impairment charge due to its acquisition of Somerfield supermarkets. Its operating loss stood at $148 million after reporting a profit in 2012, this meant its total "comprehensive" loss stood at £2.5 billion. Last year's loss came in at £529 million.

"2013 was a disastrous year for The Co-operative Group, the worst in our 150-year history," interim CEO Richard Pennycook said in Thursday's press release.

"Today's results demonstrate that but they also highlight fundamental failings in management and governance at the group over many years. These results should serve as a wake-up call to anyone who doubts just how serious the challenges we face are."

Pennycook was put in charge of the group after the previous CEO Euan Sutherland resigned last month, saying efforts to overhaul the troubled business had become impossible because of entrenched governance issues.

The future of the group looked healthy back in 2009 with a series of acquisitions but a deal to buy branches of Lloyds Bank - part-owned by the U.K. government - fell through in 2013. Additionally, the acquisition of rival mutual Britannia back in 2009 was blamed for a £1.5 billion capital shortfall at the group.

Meanwhile, former bank chairman Paul Flowers, who resigned in 2013, was caught in tabloid sting allegedly trying to buy illegal drugs. He has since been charged with drug possession.

The Co-Op said that its businesses had traded consistently with management expectations in the early part of the new financial year and had made some progress with its strategy for its food unit.

It said it had plans to launch over 100 new convenience stores this year despite underlying profit for its food sector seeing a decline. Its farms and pharmacy businesses are still due to be sold, it added, and it is continuing to explore opportunities for the sale.

The Co-Op's troubled banking unit still remains the main area of focus, however. It will continue with plans to raise capital of £400 million in addition to its existing £1.5 billion recapitalization plan. The group as a whole is expected to contribute £333 million of capital this year to help make up the shortfall.

Earlier this year, U.S. hedge funds managed to wrest control of the bank and now own an approximate 70 percent share.

Following the earnings release, Roger Barker, the director of corporate governance at the Institute of Directors, warned that the Co-Op might not survive without "radical changes."

"The scale of value destruction over the last few years has been catastrophic. Without major changes to its governance model, the Co-operative Group will struggle to survive over the medium term," he said in a research note.

"This is a huge concern for the 90,000 people employed by the group. It also threatens the objective of creating an economy with a diversity of corporate structures."